By Michael S. Derby
NEW YORK, Aug 3 (Reuters) – Federal Reserve Bank of New York President John Williams said he remained optimistic that inflation pressures are on track to ease gradually, but if they don’t the U.S. central bank will not hesitate to respond with rate hikes to ensure price pressures return to target.
If energy prices and trade tariffs have peaked and the economy remains on a solid footing, “I think that some of the big drivers that pushed up inflation” over the last year and half or so “will not be at play as much, and then some of the disinflationary forces that we’ve been seeing” should reassert themselves, Williams said in an interview with Reuters on Friday.
Williams said “I am quite honestly focused quite a bit on, what are we seeing in the core inflation data over the next several months, and is that consistent with a kind of a run rate of inflation moving towards 2% and really on a disinflationary path consistent with us achieving our 2% inflation goal on a sustained basis by 2028.” He added, “my forecast personally is for inflation to come down in the second half of this year and come down further next year.”
Williams reiterated the current stance of interest rate policy is “well positioned” to bring inflation back to target.
But Williams noted that “if the economy is not on a trajectory that will bring inflation back down to 2% … it would absolutely be appropriate to act to get us on a trajectory that does bring inflation back to 2%.”
Inflation stands well above 2% and has not been at or below target in more than five years.
Last week, the policy-setting Federal Open Market Committee meeting left the federal funds target rate range unchanged at between 3.50% and 3.75%. Williams said he “strongly … supported the decision of the committee” to hold rates steady.
MARKET FRICTION
Heading into last week’s meeting, financial markets speculated whether the Fed might raise rates given how high inflation is versus the target and how long it has been above the target.
The inflation measure the Fed uses for its 2% target rose 3.7% in June on a year-over-year basis. It still faces upward pressure from supply shocks triggered by things like the Iran war and President Donald Trump’s tariffs, as well as demand pressures from things like hefty business investments in artificial intelligence.
Three Fed officials dissented at the meeting, and all said in statements released on Friday that the Fed needs to boost the cost of short-term borrowing to get inflation down.
“Inflation has remained stubbornly above 2% for more than five years, and I am not confident it will return to our objective on its own,” Cleveland Fed President Beth Hammack said.
Long-term bond yields have been rising, with investors worried inflation pressures will stay high. Futures traders have priced in a decent chance the Fed will raise rates by year end.
Williams acknowledged there is ample uncertainty around the outlook right now and that the renewal of conflict in the Middle East makes it unclear when energy prices might fade. But he said once there is a resolution and shipping traffic resumes, improvement could be swift.
“I don’t anticipate, at least based on what’s happening so far in my base case, that we’re going to see … continued inflationary push in the second half of the year or the next year from the from the conflict in the Middle East, but that’s something that obviously could change depending on circumstances,” Williams said.
Asked if the Fed would feel bound to set monetary policy based on market levels, he responded “absolutely not,” although the central bank closely watches financial markets.
“We always have to come do our own analysis, do our hard work, assess all of the … factors influencing the economy, the outlook,” Williams said.
Financial markets are navigating a changing Fed communications environment under new Chairman Kevin Warsh, who has moved away from providing so-called “forward guidance” about the policy outlook.
AI IS OK
Williams is also upbeat about the outlook for AI and said that some of the ups and downs the sector has seen recently are not a surprise.
Asset price volatility “just comes with a highly innovative … fast-changing world there, and we’ve seen that in the past,” Williams said.
When it comes to firms borrowing to build their business, he said leverage levels are not like those that helped lead to the financial crisis two decades ago. “Most of these businesses have very high earnings, so I’m not as worried about the financial stability from the leverage right now.”
(Reporting by Michael S. Derby; Editing by Dan Burns and David Gregorio)
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